Income: The Three Disruptions

Altering the status quo of retirement & longevity planning

By Francois Gadenne

Mr. Gadenne is chairman and executive director of the Retirement Income Industry Association (RIIA). Connect with him by e-mail at or visit RIIA at

Retirement management is not “same-old-same-old” investment management, “better asset allocation”, “new labels on old wine” or “talking-the-talk but not walking-the-walk”. Retirement management is a set of fundamental disruptions from our traditional understanding of investment management.

The top three disruptions include:

The First Disruption: Clients are the bedrock of an industry
The risk profiles of investment clients are well documented. The risk profiles of retirement clients are documented in this curriculum. They include the risk profiles of investment clients but they also include new risks. In particular, the risk profiles of retirement clients include a category of un-systematic, client specific “Chance” risks (e.g. Longevity, Healthcare Costs, Household Shocks) that cannot be diversified away in the capital markets. These additional risks mean that retirement management cannot be a “single cylinder” risk management engine based on “risk retention”/diversification/asset allocation. This means that retirement management, as shown in this curriculum, must become a 4 or even a 5-cylinder risk management engine that includes risk “retention”, “pooling”, “transfer”, “avoidance” and as added to the list most recently, “barbelling”.

The Second Disruption: Business models are foundational building blocks for an industry
Successful business models are anchored in the bedrock of the Clients’ needs, wants and behaviors. The business model of retirement management is different from the business model of investment management. The business model of investment management is “gathering assets under management (AUMs)”. The business model of retirement management is “paying a monthly check”.

This difference is fundamental and ripples through the value-chain of the Financial Industry, causing a cascade of other disruptions that makes it impossible to “do” retirement management as a small adaptation to investment management. Retirement management is not a 20% change to the business model of investment management, it is a 10X change to the business model of investment management. Incremental thinking and adaptions will not “move the needle”.

The Third Disruption: Traditional investment management is a special case of the larger financial framework that has been developed and formalized since the 1950s

The larger framework considers both Wealth and Consumption from Wealth. Traditional investment management focuses on growing Wealth. Retirement Management as a “monthly check” re-introduces minimum consumption in the financial equation and explores its consequences, starting with the impact that it has on our primary advisory goal for the client. The goal of investment management is to expose the client’s wealth to upside potential subject to a risk profile. The goal of retirement management is “First Build a (minimum consumption) Floor, Then Expose (to wealth growing) Upside”. The basic idea can also be expressed as a range of other expressions.

This optionality of expressions reflects our caution about universally prescriptive statements in this field. This is in part due to the range of opinions – that cannot be proven a-priori – about a practitioner’s view (and their clients’) of the primacy of the probability/odds of failure vs. the magnitude/consequences of failure. Some believe that the probability of failure looms greater in people’s minds than the magnitude of failure. Others believe that consequences always trump the odds. There is no way to tell, a-priori, who is right and who is wrong for a specific set of circumstances whose resolution and outcomes are yet ahead of us.

Optional expressions of “First Build a Floor, Then Expose to Upside” include:

  • “Build a Floor and Expose to Upside”,
  • “If “Able, Build a Floor Then Expose to Upside”,
  • “First Insure, Then Invest”,
  • “Insure and Invest”,
  • “Cushions before Optimization”, etc.
The business model of retirement management is different from the business model of investment management. The business model of investment management is “gathering assets under management (AUMs)”. The business model of retirement management is “paying a monthly check”.


This Third Disruption is most interesting if only by the amount of debate it can generate among RIIA members. Our consensus at the time of this writing is that, indeed, a “zero-risk” consumption floor is unrealistic for many reasons. This is particularly true if one were building such a floor from Financial Capital only and in the current Zero Interest Rate Policy (ZIRP) environment. However, all of us, rich or not, will have to find a way to generate a minimum consumption floor in retirement. Some will only be able to rely on their Human and Social Capital. Others may also be able to rely on their Financial Capital. Some floors will be fragile to the variances of the mix of risks that apply, so uniquely, to each one of us. Efforts to make specific parts of such floors less fragile to the variance of the matching risks may be prohibitively expensive.

All recognize that naked exposure to retirement risks, including sequence of returns risk, will have great negative impacts on some, but not necessarily all, retirees’ actual life experience. Something needs to be done about it and it is not likely to be found doing “same-old, same-old”.

Understanding the impact of social and human capital

Human Capital adaptations – departures from past trends – to expensive consumption flooring can already be seen in the employment data, suggesting that more people are working longer than before, and certainly longer than expected for many. Social Capital adaptations can be seen in the reported increase of multi-generations households (grown children living with their parents or the elderly moving in with their children) as well as in the Social Security, Medicare/Medicaid elections advisory work performed by some RIIA members who use the Household Balance Sheet View (sm) as a map.

As we look at the Household Balance Sheet, we see that clients can, not only make adaptations to their three major sources of capital (Human, Social, Financial) but also to their Liabilities. Finally, Financial Capital adaptions may be seen with advisors who are moving from a primary focus on upside portfolio optimization to developing individualized trade-off points that take the following in consideration:

  • the variance of total return solutions (sequence of returns problem),
  • the variance of behavioral risks that cannot be diversified in the markets, and
  • the expense of mitigating these variances for the consumption floor.

Again, our consensus position is that there is no universally prescriptive solution about floors, upside and risks. There are many combinations of client exposures to risks and to their related moments. There are many available process and product solutions on the table. There may be many more solutions yet to be discovered. Advisors need to understand their client households, the range of risks/moments they face, the trade-offs that can be achieved, the valid solutions that they can access and then match them all with one another to the best of their abilities.

The distinctive value of using “First Build a Floor, Then Expose to Upside” as an easily memorized goal that is more than “new labels on old wine” and that encapsulates what to do with these fundamental disruptions in our business is not to imply zero-risk or risk-free exposures for retirees. Instead, its value is to help us extend our view from a traditional “upside” focus on concave client exposures (seeking an expected return with long exposures to risky assets whose un-systematic risk can be reduced by diversification in the capital markets) to this upcoming and rapidly developing “flooring” focus on creating more convex client exposures to the wider range of risks that affect retiring and retired households. The old adage, “It is the variance that kills you” is doubly, or perhaps more accurately – “compoundedly”, true for retirement portfolios